Pivoting From Auctioneers To Online Sellers—eBay Takes On Amazon

John Donahoe stood before investors a year after being appointed eBay CEO with a bleak assessment of the company’s performance.

"Our core eBay business simply [has] not kept pace with the changing competitive environment nor kept pace with our customers’ needs," Donahoe said in March 2009, before announcing his plan to turn the auction site around, a move that would pit it against goliath online retailer Amazon. "This is not acceptable to me or to you."

Ebay was one of the few major Internet companies impervious to the dotcom bust. It had been born with a business model so efficient that it had been instantly and consistently profitable—the now defunct Industry Standard once called eBay "unstoppable." For the past five years, however, it had been spiraling downhill, its auction business failing to keep pace.

Small wonder. The site had relied on its elegantly simple business model—to be a conduit for buyers and sellers to find each other without ever touching costly inventory. As a result it skimped on technological innovation. Its interface was ugly and its search engine outdated, making it difficult for shoppers to find the products they wanted. This was a fatal problem for a site that had been created as a "perfect market," a place where people could meet and determine exactly how much a product was worth through a bidding process.

Not only that, the market for people interested in selling used goods through auctions, eBay’s core business, was limited, and it had long been captured. And if eBay had an overarching strategy for acquiring assets in order to maintain its meteoric growth rates in a non-auction business, it wasn’t clear what that was. It purchased plenty: buying content-finding toolbar StumbleUpon for $75 million, apartment-listing website Rent.com for $400 million and, most infamously, Skype for $2.6 billion. But it later conceded it didn’t know what to do with any of them.

And members of the eBay community, the term used from inception for eBay’s buyers and sellers, were grousing. Consumers complained about a lack of customer service and few protections if they bought counterfeit merchandise. Sellers criticized a lack of communication, with eBay making major changes to their fee structure or policies without warning. The relationship became so bad that at an eBay Live! Conference, a seller tried to storm the stage in anger.

Meanwhile, Amazon, which after the tech bubble had been worth less than a third of eBay, set about proving that it wasn’t going to be just another dotcom flop. It moved from selling books to selling pretty much everything, and selling it cheaply and conveniently. It also pivoted in its own right, expanding from online retail to e-book manufacturing when it launched the Kindle. The result was a market cap that increased six-fold between 2001 and 2009, leaving it worth more than double the auction site.

Donahoe wasn’t going to let eBay waste away like Yahoo, HP, and Myspace. Instead, he would change the outmoded online auction site for used goods into a tool that let people search for, browse through, and pay for any item, used or new, in season or out, and do it from anywhere. In effect, complete a standard zoom-out pivot, where the auctions would be just a single feature of a much more expansive company, launching it headfirst into Amazon’s domain.

EBay "really started to think of itself, not as a [consumer to consumer] site, not as a used goods site, not as an auction site, but as an end to end ecommerce powerhouse," said Devin Wenig, president of eBay Global Marketplaces, in a telephone interview. "At that point we began to significantly broaden what was sold in the marketplace." At the same time, it developed PayPal as a second core business as part of its "end to end" shopping experience, which Fast Company covered in a separate video here.

But Wenig argues that while the two are competing more in some areas, eBay had no plans to adopt Amazon’s business model. "Amazon is perhaps trying to be the last retailer left on Earth," he said. "Ebay is not a retailer. We don’t own goods. We don’t want to do that. We want to be a partner to retailers and brands."

So, before it could take on the retail behemoth, it had to attract large retailers that could offer consumers a wider selection of popular items, rather than the long-tail collectibles it was known for, and provide them with more consistently positive experiences. (At the same time, eBay maintains it treats and values its smaller sellers just as much). It seemed a natural fit: retailers get more than 100 million potential buyers for their products on a site that, unlike Amazon, does not sell products of its own to compete with them.

But in order to get big stores on the site it needed a more consistent experience: a search engine that worked, policies that protected buyers (and sellers) from fraud, and guarantees that policies wouldn’t change overnight, upending retailers’ sales strategies.

EBay launched attacks on all fronts. It fixed its search engine, which presented unique technical problems, since a significant part of its business was still real-time auctions. It created a one-stop search engine that found results for all of its listings, rather than dividing items into core and non-core goods, tripling the number of products searched overnight. It improved the speed and accuracy of the results. Because of the changes, the number of items sold in the U.S. increased 8% in 2010, compared with 4% growth a year earlier.

At the same time, it worked to improve its relationship with sellers. It changed the way it made major policy changes, making only two or three a year and discussing them ahead of time with retailers in order to give them time to adapt and to get their feedback. "Donahoe came in and really fixed these things," said Scot Wingo, CEO of ChannelAdvisor, which helps retailers sell online.

The result was that fixed price selling (a fairly reliable indicator of retail versus consumer sales) almost doubled from just over a third of overall sales in 2006 to almost two-thirds today. Big retailers are the "fastest growth segment" within that, but are probably still the smallest in total size, said Wenig, who declined to provide more specific figures. Among the stores eBay has attracted are Toys R Us, Barnes & Noble, and Timberland.

The company also took eBay mobile, bringing it to consumers "at the mall or at the coffee shop or at the local boutique," with apps that let people buy or sell directly from their phones, scan bar codes to more quickly upload items they want to hawk, virtually try on sunglasses, and identify clothes with similar patters to the ones they have a picture of. Mobile sales went from virtually nothing in 2008 to $13 billion in 2012. "Mobile is not a conceptual future drive for eBay," wrote analysts at Cowen and Company. "It is a palpable driver of the business today."
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The results of the combined efforts is that eBay is no longer primarily an auction house. Instead, it’s a fast growing e-commerce tool. Net income increased almost tenfold between 2007 and 2011 to $3.2 billion. The number people who bought, bid on, or listed items on eBay increased 22% over that period, as more people logged on for new goods or through convenient mobile apps. Its stock price rose more than 68%, giving it a market cap of $66 billion, just shy of its 2004 peak, which it had reached shortly after meeting what had appeared to be an outlandishly optimistic three-year revenue goal.

Ebay has declared victory. While it’s still worth only about half of Amazon, which has been experiencing its own spectacular growth, no longer is it just an outlet for attic collectibles or Sarah Palin’s gubernatorial jet. Today, you can buy Apple iPads or Barnes & Noble Nooks at a discount. But that’s not the end of eBay’s turnaround.

Ebay plans to continue its transformation into an e-commerce giant. It’s "striving" to double its users in the next three to five years, as more people across the world gain Internet access, Donahoe said in October. It’s unveiling Cassini, a new search engine that will look through text, in addition to the headlines searched by the current system, as early as next year. It’s poised to take on Amazon’s personalized recommendations, recently launching a Pinterest-like feed that’ll make it easy for users to browse through stuff eBay thinks they may like, rather than to just go to the site when they know what they want to buy. And if you think Amazon’s delivery is fast, eBay’s testing out an even faster system in San Francisco and New York, where people can get same-day delivery service from brick and mortar stores, including Target, often within an hour.